Mortgages targeted in global supervision crackdownMortgages targeted in global supervision crackdown
LONDON - Mortgage lenders must check better if borrowers can repay home loans, a global forum of regulators said on Friday in a wide-ranging report aimed at plugging regulatory gaps uncovered by the credit crunch.
The worst financial crisis since the Great Depression began in 2007 with defaults in U.S. home loans which, via securitisation, rippled across the world to harm the economy and force governments to use trillions of taxpayer dollars to shore up banks.
The G20 group of countries is spearheading global efforts to toughen up financial regulation and apply lessons from the crisis.
It asked a forum of three global regulatory bodies last November to devise ways to strengthen oversight so that system-wide and not just firm-based risks are also covered
The recommendations from the Basel Committee on Banking Supervision, the International Organisation of Securities Commissions and the International Association of Insurance Supervisors signal a marked shift in the breadth and depth of regulation and supervision.
The forum said the recommendations seek to enhance the nature and expand the scope of financial regulation. For Factbox on main recommendations click on [ID:nLDE6070RF]
Unless action is taken, these issues may continue to pose systemic risk to the financial system and the global economy, the forum said in its report.
The recommendations introduce or tighten supervision on hedge funds, mortgages and credit derivatives in particular and seek to improve how supervisors of banks, insurers and markets work together in general, particularly across national borders.
A fundamental aim is to make it harder for financial firms to shift activities to a sector or country that is more lightly regulated or capitalised or play one regulator off against another.
Blurred distinctions between sectors and difficulties faced by supervisors in spotting risks were uncovered by the near collapse of U.S. insurer AIG (AIG.N), the demise of U.S. bank Lehman Brothers, and the bailout of Fortis in Belgium and the Netherlands, the report said.
AIG was an extremely complex operation which had many subsidiaries and was basically able to chose its supervisor, the report said.
It marks a crackdown on firms using unregulated entities to lower overall capital requirements such as by using a holding company in one country to control a regulated entity in another.
The recommendations include the need for consistent capital requirements across all sectors and activities, expanding on what is already in place in the banking sector.
A uniform minimum global capital standard does not exist for the securities and insurance sectors, the report said.
Some recommendations, such as on regulating hedge fund managers and increasing transparency in derivatives, are already being acted on through legislation in the United States and European Union.
Other recommendations are more ground breaking such as in cracking down on mortgage lenders though stopping short of product approval.
The forum wants lenders to adopt minimum underwriting standards to ensure the ability of each borrower to repay the loan is accurately assessed.
The standards should also include effective verification of income -- Britain is already proposing to ban self-certified or liar loans -- and include appropriate standards for loan-to-value ratios.
For full report click on www.bis.org/publ/joint24.pdf
(Reporting by Huw Jones, editing by Toby Chopra)